Treasuries Little Changed as Yellen to Be Named Fed Chairman

Oct. 9 (Bloomberg) -- Treasuries were little changed after a White House official said Janet Yellen will be nominated to head the Federal Reserve, fueling bets the central bank will keep borrowing costs low and maintain policies to spur growth.

One-month bill rates fell after climbing to the highest level for the benchmark security since 2008 yesterday as the U.S. government approaches an Oct. 17 deadline to raise its debt ceiling. The Fed will release minutes from its Sept. 17-18 meeting at 2 p.m. and President Barack Obama will announce Yellen’s nomination at 3 p.m., a White House official said. Ten- year note yields fluctuated before the U.S. sells $21 billion of the securities.

"There are expectations for that dovish tone to continue going forward," said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Fed. "Over the next few years, rates will remain low. Every day that goes on there are more concerns about the debt ceiling."

The 10-year yield rose one basis point, or 0.01 percentage point, to 2.64 percent at 8:34 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 2/32, or 63 cents per $1,000 face amount, to 98 3/4.

Bill Yields

Rates on Treasury bills due on Oct. 24 rose five basis points to 0.36 percent after being negative as recently as Sept. 27. Rates on bills due Nov. 21, just over a month after the debt-ceiling deadline, were 0.04 percent, down from 0.06 percent reached Oct. 4, the highest level since July 3.

The difference between what banks and the Treasury pay to borrow money for one month, known as the TED spread, yesterday inverted for the first time since Bloomberg started collecting the data in 2001. It was at minus five basis points today after falling to minus 16 basis points yesterday.

Fed Vice Chairman Yellen would succeed Chairman Ben S. Bernanke, whose term ends Jan. 31, after he cut interest rates to a record of almost zero in 2008 and began a bond-buying program, known as quantitative easing, to put downward pressure on borrowing costs.

‘Same Cloth’

"Yellen and Bernanke are cut from the same cloth," said Richard Clarida, a former assistant Treasury secretary who is now an executive vice president at Newport Beach, California- based Pacific Investment Management Co., and professor of economics at Columbia University in New York, in an interview on Bloomberg Television with Tom Keene. An early task will be to "lay out tapering and reduction of the Fed’s QE. At some point in 2014, it’s very likely the Fed will be tapering."

Minutes from last month’s Federal Open Market Committee meeting may "shed a little bit of light" on Bernanke’s decision then to delay tapering, Lederer said.

Treasuries due in one to 10 years have fallen 1.2 percent in 2013, while those maturing in a decade or longer tumbled 9.2 percent, based on Bloomberg World Bond Indexes.

Shorter-maturity U.S. notes tend to follow what the Fed does with its target for overnight lending between banks, while longer-dated bonds are more influenced by the inflation outlook.

"Yellen’s nomination has helped Treasuries," said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. "The five-years are rallying the most. The belly of the curve -- the five-to-seven years -- tend to perform well in a rally."

Inflation Outlook

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was little changed at 2.21 percentage points. The spread expanded to 2.27 percentage points on Sept. 23, the most since Aug. 13.

In addition to today’s 10-year offering, the U.S. plans to sell $13 billion of 30-year bonds tomorrow. It auctioned $30 billion of three-year securities yesterday.

At the previous 10-year sale on Sept. 11, investors bid for 2.86 times the amount available, the most since March at the monthly auctions. Yesterday’s three-year note drew bids for 3.05 times, the least since June.

The U.S. sold $30 billion of four-week bills yesterday at a rate of 0.35 percent, versus zero percent as recently as last month. Three-month bill rates climbed as high as 0.1318 percent today after dropping to negative 0.0101 percent on Sept. 27.

Extra Yield

The extra yield investors get for buying one-month securities instead of 91-day securities was at 25.8 basis points after reaching 28.9 basis points yesterday, the biggest difference since March 2008, according to closing-market data. It’s usually the other way around. In 2013, investors have been able to earn an extra basis point on average by buying the longer-dated security.

Two years ago, one-month bill rates climbed to 0.17 percent in the days before the Aug. 2, 2011, deadline set by the Treasury to avoid a default approached. They traded at 0.015 percent in December 2012 before a year-end trigger would force automatic spending cuts and tax increases.

The three-month rate climbed to 0.09 percent before the August 2011 deadline, and it rose as high as 0.081 percent in the week before Dec. 31, 2012.

--Editors: Kenneth Pringle, Dave Liedtka

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net